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Did Swipe-Fee Reform Help Consumers?

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When the Durbin Amendment took effect in October, capping the swipe fees that banks can charge retailers on debit card transactions, consumers predictably got caught in the cross-fire. Crying poverty over the loss of revenue, the large banks affected by the reform started phasing out their free checking offerings; one bank, Bank of America, even proposed a $5 monthly debit card fee before it was shut down in the face of consumer anger.

Nearly a year later, bickering between the banking and retail lobbies continues as both sides try to sway public opinion.

The latest salvo was fired by the Merchant Payments Coalition, a group of merchants dedicated to lobbying against credit card fees. Examining data from moneyrates.com and bankrate.com, the group noted that trends in swipe fees and checking account fees over the last several years cast doubt on the idea that the Durbin Amendment was responsible for killing free checking.

“Swipe fees have tripled over the last decade, but that certainly hasn’t resulted in consumer checking fees getting cut by a similar amount,” points out Tom Wenning of the National Grocers Association.

In other words, if checking account fees were really related to how much revenue the banks were getting from swipe fees, then you might expect the banks to lower their fees during times when they were bringing in more swipe fee revenue. But the data analyzed by the group shows the opposite: Even as banks made more and more money on swipe fees, average checking account fees stayed steady or rose.

The banking industry disputes that analysis, of course, arguing that the data in question only considers those checking accounts that have fees. A better analysis would be to look at how the availability of free checking changed before and after swipe-fee reform.

“They’re not taking into account the free checking accounts,” says Nessa Feddis, a spokesperson for the American Bankers Association, noting what big-bank customers already know: That totally free checking accounts have been harder to come by in the last couple of years.

But the retailers counter that a lot happened to the banking industry over the last few years, not all of which can be pinned on lower swipe fees.

“Free checking was declining before the Durbin Amendment,” says Doug Kantor, counsel for the MPC. “In 2008 we had a fiscal crisis, and free checking went down because of that, not because years later they capped interchange fees.” He adds that free checking options have actually started to rise in the wake of swipe-fee reform, as smaller banks (which are exempted from the Durbin Amendment) increase their free checking offerings to lure customers away from the big banks.

Interestingly, that’s a contention at least partially supported by the ABA’s numbers. As of a 2010 survey conducted by the organization, 53% of respondents reported that they paid nothing for their checking account. But in summer 2011, right before Durbin was set to take effect, that number jumped to 71%, before settling to 59% in the most recent survey conducted last month. Those numbers suggest that, contrary to what you might expect, access to free checking has actually increased as swipe-fee reform has taken affect.

Still, the banking lobby maintains that reform has made it harder to get access to free checking. Feddis notes that some confounding variables may be at work in those numbers, including the possibility that consumers have been better able to maintain minimum balances as the economy has recovered over the last couple of years. And while she concedes that aggressive competition from smaller banks has made it possible for consumers to still find free checking options, she suggests that this might not be the case for much longer.

“For the moment the interchange fee is higher for the small institutions, but that’s not going to be maintained,” she says. “Competitive pressures are going to push those [fees] down.” The smaller banks may not be required to cap their debit card fees, but if they want to compete with the big banks, they may have to come down a bit. And when that happens, they’re also going to have trouble maintaining free checking options.

So whether the Durbin Amendment helped or hurt consumers depends a lot on whom you ask, and it’s clear that not all consumers have been impacted equally. Customers of big banks undoubtedly saw their free checking options dwindle, while those at credit unions and small banks (and those willing to switch to those smaller institutions) were able to escape largely unharmed, at least for now.

And whether the lower fees have resulted in lower costs at the cash register is also unclear. The MPC notes that debit card usage is heaviest at supermarkets, drugstores and convenience stores; such merchants, says the MPC, tend to have lower margins to begin with and “operate in an environment where it is difficult to pass along price increases to the consumer.” Still, the organization points to a report from Moody’s that suggests that the swipe-fee cap has at least allowed retailers to keep prices steady as other costs rise.

Whatever the ultimate impact of swipe-fee reform turns out to be for consumers, one thing seems clear: The banking and retail industries probably aren’t going to stop bickering about it any time soon.

Image: BeauGiles, via Flickr

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